break even

Question 1

how do you work out break even?

Answer 1

fixed costs / contribution

fixed costs / ( selling price - variable costs )

Question 2

how do you work out profit?

Answer 2

margin of safety X contribution

Question 3

how do you work out margin of safety?

Answer 3

capacity - breakeven

Question 4

1. what is revenue?
2. how do you work out total revenue?

Answer 4

1. money a business makes from sales
2. quantity sold x selling price

Question 5

1. what are fixed costs?
2. what are variable costs?

Answer 5

1. costs that do not vary with output such as rent
2. costs that vary in direct proportion to output

Question 6

how do you work out total costs?

Answer 6

fixed costs + variable costs

Question 7

1. what are direct costs?
2. what are indirect costs/ overheads?

Answer 7

1. costs that arise specifically from the production of a product such as direct labour
2. costs that don’t directly relate to production

Question 8

1. what are the advantages of a business plan?

Answer 8

• helps owners understand the viability of their business by giving them a visual representation between costs revenues and profits
• helps owners understand the level of risk by illustrating how different sales values effects profitability
• helps a business to strategise effectively by aiding in decision making regarding costs, prices and sales targets
• illustrates the importance of aiming for low fixed costs

Question 9

what are the disadvantages of a breakeven?

Answer 9

• unrealistic as it assumes constant costs and prices which in reality always change
• limited scope as it does not account for the impact of external factors such as economic changes
• most business sell more than one product so a business would have to make multiple break even analysis’s that can lead to confusion and inaccuracy when looking at a businesses overall profitability